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Financial Transaction Tax – Where Does Europe Stand?
Much has been said or written, and more recently proposed, on the financial transaction tax, since Nobel prize winner James Tobin launched the concept back in 1972. The initial idea was to raise funds by taxing financial transactions.
In this context, the European Commission has proposed an EU-wide initiative, facing strong opposition, not only from countries such as the UK, but also opposition from the whole European finance sector, and in particular the fund industry. The critics highlight the fact that it will mainly be individual investors who would be financially hit by such additional costs. In addition, the market stabilisation effect would not be efficiently addressed, as certain types of undesired financial behaviours that are targeted would not be substantially influenced. Taxand Luxembourg examines the EUs proposal for an EU-wide financial transaction tax and how this would be received by member states.
On 28 September 2011, the European Commission adopted a proposal (the "Proposal") aimed at introducing an EU-wide Financial Transaction Tax ( "EU FTT"), which would apply as of 2014 if adopted. The goal would be to combine fund raising to finance hard hit EU member budgets and at the same time mitigate market risk.
This EU FTT would apply to a broad scope of transactions with a link to Luxembourg, based on the principle of residence of the financial institution or trader rather than the place where the transaction is realised. The concept of financial institution is broad and the EU FTT would apply to a wide variety of financial instruments, including over the counter instruments that may trigger some implementation difficulties. Certain exclusions are provided however, in particular in respect of retail banking covering for example mortgages, bank loans and insurance contracts.
The structure of this EU FTT may raise some questions as to whether it would fulfil its goals, as other commentators but also recognised institutions such as the IMF raised as an alternative a tax on the actors themselves.
The fund sector highlights the fact that individuals investing in funds for their pension schemes, for example, would be the main contributors for such a tax, as the costs would probably be reflected in the fund management fees.
The lack of political unity on the subject within Europe and more broadly between Europe and the USA may complicate the discussions and chances of success for this EU FTT.
Reaction to date to the draft EU FTT suggests uncertainty regarding the likelihood of the tax being adopted on an EU wide level. It may however be implemented in certain key EU jurisdictions - where similar transaction taxes exist already.
The next few months will be crucial in determining the outcome of the current discussions. In light of this, now may be the right time for funds and asset managers to undertake a preventive review of their existing fund cost structure and performance modelling, as well as its potential impact on both information disclosures and agreements in place, to ensure all scenarios are prepared for when planning for the future.
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